Article / 19 July 2016 at 7:57 GMT

FX Update: AUD heads down under on RBA minutes

Head of FX Strategy / Saxo Bank
  • RBA's July meeting minutes heighten chances of August rate cut
  • AUDUSD drops
  • RBNZ proposes stricter rules to stem lending to frothy housing market
  • AUDNZD showing signs of exhaustion, possibly consolidating towards 1.0550/1.0600
  • ECB likely to send a dovish message on Thursday
Australian outback
 The Aussie dollar fell when minutes of the central bank's July meeting seemed 
to set the stage for an August rate cut down under. Photo: iStock 

By John J Hardy

The Reserve Bank of Australia's minutes of its July meeting engineered a fresh drop in short Australian interest rates, highlighting risks that the exchange rate is leaning against the recovery and that the upcoming CPI release next week as well as new economic forecasts would be important for rate adjustment implications. 

“This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate,” the RBA said. The market took this as a stronger hint that the August RBA meeting will cut rates. 

Also strongly hinting at new rate cuts is the Reserve Bank of New Zealand, which overnight proposed new, stricter macro-prudential rules to stem lending into the bubbly housing market. The bank, which will issue an update of its economic assessment on Thursday, hopes to clamp down on housing appreciation risks from coming rate cuts, the argument goes. There are some signs of exhaustion in AUDNZD, however, as new highs overnight have been at largely rejected – possibly leading to further consolidation to the 1.0550/1.0600 level, even as we expect the pair to trade much higher eventually.

The UK’s new prime minister Theresa May will travel to the continent this week and meet German chancellor Angela Merkel on Wednesday and French president Francois Hollande on Thursday. The general tone of subsequent rhetoric from the European Union counterparts will be the key takeaway as we await the timing of the formal invocation of Article 50 that sets the Brexit in motion.

AUDUSD drops

There's been a significant adjustment lower in short rates overnight after the RBA minutes further eroded the Aussie strength and further spotlighted the triangulating tendency of the AUDUSD chart. This makes trendline breaks more significant, and the area around 0.7300 looks rather important as this was the post-Brexit vote low and near the 200-day moving average and eventually converges with the rising trendline.

The G-10 rundown – summer doldrums edition

USD – the next interesting data does not come until week after next, though  the Fed is up next Wednesday amid very tepid expectations. Expect them to talk up rate-hike potential to get the odds for a September rise closer to 50/50 in case data continues to improve at the rate we saw in the June cycle.

EUR – The European Central Bank is likely to send a dovish message on Thursday and hint at possible technical measures for coming meetings. But the critical stumbling block for Europe is political, and the decision on whether to make an exception to the clearly spelled-out new rules and bail out the Italian banks. Judging from recent moves in CDS for the wobbliest banks, the market is hopeful that a solution will be forthcoming, if still nervous.

JPY – the yen is firming a bit as JPY crosses bumped around near the top of recent rallies. The consensus is that the Bank of Jappan will announce further measures at its meeting, but what can move the needle without fiscal involvement?

GBP – CPI today, plenty of leeway for an upside surprise after post-Brexit vote pummeling for sterling. Sterling under pressure again versus G3. Prefer GBPUSD lower if 1.3300 stays intact.

CHF – EURCHF continues to trade south of 1.09. Chart suggests 1.0800 is a line in the sand for the SNB.

AUD – the RBA minutes indicated a higher likelihood of a rate cut – plenty of room to move on the chart to next major supports in AUDUSD ahead of key CPI release late next week.

CAD – USDCAD dribbling higher with key data on tap this Friday from Canada (CPI and retail sales). We prefer an upside resolution after long bout of range trading.

NZD – further weakness, with NZDUSD now approaching last key support zone 0.7000/50. Action down through these levels suggests full breakdown that could lead to the lows of the cycle.

SEK – A sizable consolidation in equities and EURSEK may continue to challenge higher, even if SEK getting too cheap.

NOK – can we “delist” a currency? Most of 2016 has been almost entirely without developments for NOK.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0830 – UK Jun. CPI 
  • 0900 – Germany Jul. ZEW Survey 
  • 1100 – Turkey Central Bank Announcement 
  • 1230 – US Jun. Housing Starts and Building Permits 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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